Govt to avoid credit rating downgrade with Budget even though net govt debt to hit 32% of GDP, economists say

By Alex Tarrant

The government will avoid a credit rating downgrade with Thursday's Budget, according to economists, although rating agencies are unlikely to remove a negative outlook on New Zealand's AA+ rating.

Meanwhile, ASB and Westpac economists say net government debt should peak at 32% of GDP in 2015, which is above the government's self imposed 'comfort zone', as it grapples with the costs of the Christchurch earthquakes and a sluggish economic recovery.

Finance Minister Bill English will release the current National-led government's third Budget on Thursday at 2 pm which will include no additional nominal spending from last year's budget. The Health, Education and Justice spending budgets are expected to share NZ$600-NZ$800 million in spending increases this year, with that money coming from other departmental budgets. The government deficit before investment gains and losses is expected to be a record NZ$16-NZ$17 billion in the current year to June.

The government is also in danger of a credit rating downgrade, after Standard & Poor's placed New Zealand's sovereign credit rating on negative outlook last November, suggesting a one in three chance of a downgrade over the next two years. Standard & Poor's has told the government it needs to control spending and debt issuance, and to show a credible path to budget surplus, which is expected in 2015/16.

A much tighter fiscal rein and quicker return to surplus meant a credit rating downgrade would likely be averted, or at least further time would be bought, ANZ economists said in their budget overview on Monday.

"However, we doubt that S&P and Fitch will remove NZ from negative outlook, though they surprised us 2 years ago and could do so again. While an improving fiscal position will allay some of the credit rating agencies’ concerns, they will likely want to see more inroads being made into the country’s large net external liability position, which currently stands at 81.7% of GDP," they said.

"Any improvement will take time, but a return to surplus by the Government will certainly help, alongside ongoing deleveraging by the household sector."

Net debt to hit 32% of GDP

Meanwhile, Westpac and ASB economists say net government debt should peak at 32% of GDP in 2015, up from Treasury's projected peak of 28.5% in December.

"The Government has expressed a desire to keep the net debt ratio below 30%, but the higher deficit for this year alone would make that a tough call, without some cuts to the bond programme in later years," Westpac economists said.

The New Zealand Debt Management Office has increased its government bond issuance programme to NZ$20 billion this year, up from NZ$13.5 billion forecast in December. That programme would cover this year's projected deficit and about half of next year's deficit, which is forecast to be about NZ$8 billion.

Westpac expects the NZDMO to cut the government's bond programme to NZ$13.5 billion next year, while ANZ and ASB expect it to be reduced to NZ$15 billion.